May 2016 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 0.4% in May (-0.1% expected) after increasing 0.6% in April. Declines in the indexes for manufacturing and utilities in May were slightly offset by a small gain for mining. The output of manufacturing moved down 0.4%, led by a large step-down in the production of motor vehicles and parts; factory output aside from motor vehicles and parts edged down 0.1%. The index for utilities fell 1.0%, as a drop in the output of electric utilities was partly offset by a gain for natural gas utilities. After eight straight monthly declines, the production at mines moved up 0.2%. At 103.6% of its 2012 average, total IP in May was 1.4% below its year-earlier level.

Industry Groups

Manufacturing output fell 0.4% in May, and production was little changed from its level of a year earlier. In May, the production of durables declined 0.7%, the production of nondurables was little changed, and the production of other manufacturing (publishing and logging) fell 0.6%. The largest drop among durable goods, 4.2%, was recorded by motor vehicles and parts. In addition, the indexes for Wood Products (-1.3%) and machinery fell 1.0% or more. Several durable goods industries posted increases, but miscellaneous manufacturing was the only industry to register a gain of more than 1.0%. Within nondurables, increases for food, beverage, and tobacco products and for Paper (+0.4%) offset declines elsewhere; printing and support activities recorded the largest decrease.

The small increase in mining in May resulted from a rebound in coal mining, which had declined in each of the previous eight months, and a gain in nonmetallic mineral mining. Oil and gas extraction was roughly unchanged in May, but the index for oil and gas well drilling and servicing fell for the 20th consecutive month.  

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Capacity utilization (CU) for the industrial sector decreased 0.4 percentage point in May to 74.9%, a rate that is 5.1 percentage points below its long-run (1972–2015) average.

Manufacturing CU decreased 0.4 percentage point in May to 74.8%, a rate that is 3.7 percentage points below its long-run average; using the NAICS definition, manufacturing decreased 0.5%. The operating rate for nondurables was unchanged (Paper: +0.5%), while the rates for durables (Wood Products: -1.6%) and for other manufacturing (publishing and logging) each fell about 1/2 percentage point. The operating rate for mining moved up about 1/2 percentage point, and the rate for utilities dropped about 1 percentage point. 

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Capacity at the all-industries level was unchanged (+0.8% YoY) at 138.2% of 2012 output. Manufacturing edged up +0.1% (+0.9% YoY) to 137.6%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.3% (+4.4% YoY) to 165.7%. Paper edged down 0.1% (-0.6% YoY) to 117.1%.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

May 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that U.S. manufacturing’s pace of expansion expanded slightly during May. The PMI registered 51.3%, an increase of 0.5 percentage point from the April reading of 50.8%. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Perhaps the most noteworthy change was another substantial jump in input prices. Otherwise, except for slow deliveries, sub-index values either remained at/below breakeven or were unchanged/lower than in April. 

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Wood Products and Paper Products both expanded, thanks to new orders, production, employment and exports. “Market is improving steadily in both orders and pricing,” wrote one Wood Products respondent.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- decelerated in May. The NMI registered 52.9%, 2.8 percentage points lower than the April reading. The only sub-indexes with higher May values were slow deliveries and input prices. 

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Nonetheless, all three service sectors we track reported expansion. “Projects from the oil companies are becoming less and less [because of] budget problems for capital projects,” observed one Construction respondent.

Relevant commodities --
* Priced higher: Diesel (all grades), gasoline, oil, petroleum-based products, lumber products, and paper.
* Priced lower: Corrugated boxes.
* Prices mixed: None.
* In short supply: Construction labor.

One pair of ISM’s and Markit’s May surveys diverged (manufacturing) while the other pair was in agreement (services). Instead of ISM’s marginal improvement, Markit’s manufacturing PMI reported the weakest performance for over 6½ years. Both services surveys showed weaker business activity.

Commenting on the data, Markit’s chief economist Chris Williamson said:

Manufacturing -- “The survey data indicate that factory output fell in May at its fastest rate since 2009, suggesting that manufacturing is acting as a severe drag on the economy in the second quarter. Payroll numbers are under pressure as factories worry about slower order book growth, in part linked to falling export demand but also as a result of growing uncertainty surrounding the presidential election.

“For those looking for a rebound in the economy after the lackluster start to the year, the deteriorating trend in manufacturing is not going to provide any comfort.”

Services -- “The service sector reported one of the weakest expansions seen since the recession in May, adding to signs that any rebound of the economy in the second quarter may be disappointingly muted.

“With optimism about the business outlook dropping to a new post-crisis low, companies are expecting conditions to remain challenging in coming months, citing uncertainty about the presidential election as well as broader worries about weak demand at home and abroad.

“Add these disappointing service sector numbers to the downturn now being seen in manufacturing, and the PMI surveys point to GDP growing at an annualized rate of just 0.7-8% in the second quarter, notwithstanding any marked change in June.

“The slowdown and further drop in optimism continued to cause companies to pullback on recruitment, with the survey signaling just under 130,000 extra jobs being created in May, driven entirely by the service sector.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

April 2016 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $2.2 billion or 0.5% to $456.8 billion in April. Shipments of durable goods increased $1.3 billion or 0.5% to $232.5 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $1.0 billion or 0.4% to $224.3 billion, led by petroleum and coal products. Shipments of both Wood (-2.7%) and Paper (-0.2%) fell. Incidentally, the Census Bureau revised most of these data series back through 2001, and -- at least in the case of Wood during June 2015 -- seems to have introduced errors into the data. 

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Inventories decreased $0.5 billion or 0.1% to $620.8 billion. The inventories-to-shipments ratio was 1.36, down from 1.37 in March. Inventories of durable goods decreased $0.6 billion or 0.1% to $384.5 billion, led by machinery. Nondurable goods inventories increased less than $0.1 billion or virtually unchanged to $236.3 billion, led by petroleum and coal products. Inventories of both Wood (+0.4%) and Paper (+0.1%) rose. 

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New orders increased $8.7 billion or 1.9% to $460.5 billion. Excluding transportation, new orders increased 0.8% (but -1.2% YoY -- the 18^th consecutive month of year-over-year contractions). Durable goods orders increased $7.7 billion or 3.4% to $236.2 billion, led by transportation equipment. New orders for nondurable goods increased $1.0 billion or 0.4% to $224.3 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- dropped by 0.6% (-6.0% YoY). After the revisions mentioned above, business investment spending contracted on a YoY basis during 11 months of 2015, and three of the four months in 2016.

Prior to July 2014, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping on average 70% of the losses incurred since the beginning of the Great Recession. With July 2014’s transportation-led spike gradually receding in the rearview mirror, the recovery in new orders is back to just 51% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $6.6 billion or 0.6% to $1,137.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.94, up from 6.93 in March. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders jumped to 122% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Since then, however, real unfilled orders have moved mostly sideways and are penetrating further below the January 2010-to-June 2014 trend line.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

May 2016 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by a paltry 38,000 jobs in May -- a mere fraction of the +158,000 analysts had expected. That meager job growth compounded bad news from downward revisions to March and April employment gains totaling -59,000 (March: -22,000; April: -37,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) fell 0.3 percentage point (to 4.7%) as the drop in the number of unemployed persons (-484,000) exceeded the contraction in the labor force (-458,000). 

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Observations from the employment reports include:

* Manufacturing lost 10,000 jobs in May. Those results are broadly consistent with the behavior of the Institute for Supply Management’s manufacturing employment sub-index, which -- while remaining in contraction -- was stable in May. Wood Products, and Paper and Paper Products employment both gained 700 jobs.

* Mining and logging shed 11,000 jobs, with 6,100 coming from support activities for mining and another 1,700 from oil and gas extraction. Surprisingly, Construction shrank by 15,000 jobs.

* Over 100% (99,400) of May’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +11,400; Professional & Business Services: +10,000 (although Temp Help dropped by 21,000); Education & Health Services: +67,000; and Leisure & Hospitality: +11,000. This is a persistent issue, as we have repeatedly highlighted: There are 1.461 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 1.643 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. In fact, Manufacturing has lost 9,000 jobs since 2014 while FS&D jobs have expanded by 455,000. 

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* The employment-population ratio edged down to 59.7%; roughly speaking, for every five people added to the population, three are employed. Meanwhile, the number of employment-age persons not in the labor force jumped by 664,000 to a new record of over 94.7 million. 

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* As a result of so many people leaving the labor force, the labor force participation rate (LFPR) also retreated to 62.6%, comparable to levels seen in 1978. Average hourly earnings of all private employees increased by $0.05 (to $25.59), resulting in a 2.5% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.03, to $21.49 (+2.4% YoY). With the CPI running at an official rate of +1.1% YoY, in theory wages are rising in real (inflation-adjusted) terms. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours. 

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* Full-time jobs edged down by 59,000 while those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- jumped by 468,000. There are now 1.260 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by 20.0 million). PTER employment, by contrast, stopped declining in October 2015 and -- until May’s jump -- had been hovering around 6 million. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although highly seasonal, the data show the amount withheld in May increased by $3.6 billion, to $185.9 billion -- the highest amount on record for that calendar month. To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending May was 3.9% above the year-earlier average, well off the peak of +13.8% set back in September 2013.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

May 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil hit its highest level since October 2015 when rising by $5.95 (+14.6%), to $46.74 per barrel in May. The price increase coincided with a slightly stronger U.S. dollar, the lagged impacts of a 64,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in March (to 19.6 million BPD), and a modest rollover in accumulated oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI was nearly nonexistent at $0.03 per barrel. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple:

There is still much disagreement as to where prices are going in the next few months. Having seen oil prices nearly double since late February, many do not see further increases in the immediate future.  The 1 million BPD Alberta production outage is being eliminated; exports from Libya are back to about where they have been in the last year or so; and while Venezuela is approaching societal collapse, so far its oil production has been holding fairly steady. In Nigeria, however, oil production continues to drop rapidly as a new generation of insurgents in the delta is tearing up more onshore oil production facilities every day.

While the price of oil remains murky for the next six months, many are beginning to talk about the impact of the massive reductions in capital spending on oil and gas exploration and development that has taken place in the last two years.  It is starting to sink in that if oil prices remain below $100 a barrel for the next few years and global demand remains in the vicinity of the 35 billion barrels a year, three or four years from now we are likely to see global production falling in the next decade. Discovery of new oil last year was at the lowest in 60 years and well below the rate at which it is being consumed.

The only real hopes for increased production, outside of the volatile and vulnerable-to-global-warming Middle East are shale and deepwater oil. Both of these sources are likely to become increasingly expensive to produce. While a few shale oil producers are claiming profitability at $50 a barrel, they currently are relying on temporary factors such as a backlog of already drilled wells; drilling only in the most productive sweet spots; and by forcing their service suppliers to do business at a loss. All this says that the outlook for shale oil in the next decade may not be as bright as many are forecasting. 

Deepwater projects will have problems in the next decade too. These projects are very expensive, technically complex, and take years to complete. Only the largest of the international oil companies have the resources to undertake deepwater drilling, which is only profitable if oil prices are well above $100 a barrel - some suggest $150. Today about 30 percent or 22 million BPD of global oil production comes from offshore. While these wells do not deplete as fast as shale oil wells, they do so at a much faster rate the conventional land wells. All this suggest that five years from now oil production may be dropping rapidly, and oil prices may be unaffordable for many. 

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News items from OilPrice Intelligence Report editor Evan Kelly:

Oil prices were hit with some bearish news [during the last week of May], as Canada is set to bring much of the more than 1 million BPD of oil production that was disrupted from wildfires back online. But optimism is rising in the oil markets.

Is $60 around the corner? Even with that crude coming back online, there is a growing bullishness pervading the markets as of late, as forecasters raise their price projections and speculators gamble on steadily higher prices. Bloomberg reports that speculators shorting crude oil have been squeezed out of the market, and short bets have fallen to their lowest levels in almost a year. The shift in trades reflects more and more confidence that oil will not fall back down, at least not to the depths seen earlier this year. Also, several banks, including Standard Chartered Plc and SEB Bank have come out and said that oil will hit $60 before the end of the year. UAE's economic minister, Sultan Bin Saeed Al Mansoori, said on Monday that he could see oil hitting that threshold by summertime. A survey conducted by The Wall Street Journal found that the array of investment banks polled raised their price targets for Brent crude in 2016 by $2 on average in May compared to the previous month's forecasts.

Not everyone is so bullish, however. Some analysts attribute the recent price gains simply to the supply disruptions in Canada and Nigeria, outages that were always going to be temporary (at least in the case of Canada). "The output disruptions are a key factor supporting prices at the minute. We don't think prices will go much further from here," Thomas Pugh of Capital Economics told Reuters. "In fact, we think prices are vulnerable to a downturn in the short term if some of the disrupted supply returns, or there is evidence that higher prices are stimulating more production." Even with the upward revisions, many are still cautious - the average projections polled by the WSJ expect oil to trade at only $48 per barrel in the fourth quarter. 

New drilling possible. The rig count fell again last week, but with oil prices hovering around $50, market watchers are looking for clues to see if shale drillers will get back to work. Pioneer Natural Resources (NYSE: PXD) recently said that it is considering redeploying rigs if it grows confident that prices will stay above $50. But the WSJ reports that the oil majors could be more cautious, having been burned by megaprojects that cost tens of billions of dollars in recent years. "We're not going to try and get into a boom and bust," BP's CFO, Brian Gilvary, said in April. "We wouldn't be looking to significantly ramp [activity] up" even if oil prices rose to $60. The oil majors do operate in U.S. shale basins, but also source much of their oil and gas from large-scale long-lived projects. That means they won't move as nimbly as smaller shale drillers as oil prices rebound.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

April 2016 Construction Spending

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Construction spending during April 2016 was estimated at a seasonally adjusted annual rate (SAAR) of $1,133.9 billion, 1.8 percent (±1.3%) below the revised March estimate of $1,155.1 billion; expectations were for a 0.6% increase. The April figure was 4.5 percent (±1.6%) above the April 2015 SAAR of $1,085.0 billion. The not-seasonally adjusted YoY change (shown in the above table) was also +4.5%.

During the first four months of this year, construction spending amounted to $334.8 billion, 8.7 percent (±1.5%) above the $307.9 billion for the same period in 2015.

PRIVATE CONSTRUCTION

Spending on private construction was at a SAAR of $843.1 billion, 1.5 percent (±0.8%) below the revised March estimate of $855.9 billion.
Residential construction: $439.7 billion, -1.5 percent (±1.3%).
Nonresidential construction: $403.5 billion, -1.5 percent (±0.8%).

PUBLIC CONSTRUCTION

Public construction spending was $290.8 billion, 2.8 percent (±2.5%) below the revised March estimate of $299.2 billion.
Educational construction: $70.0 billion, -2.5 percent (±3.9%)*.
Highway construction: $89.4 billion, -6.6 percent (±7.2%)*.

* 90% confidence interval includes zero. The U.S. Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero. 

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Click here for a discussion of April’s new residential permits, starts and completions. Click here for a discussion of new and existing home sales, inventories and prices. 

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

May 2016 Currency Exchange Rates

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In May the monthly average value of the U.S. dollar gained ground against two of the three major currencies we track. The greenback appreciated by 0.9% against Canada’s “loonie” and 0.2% against the euro, but lost 0.8% against the yen. On a trade-weighted index basis, the dollar strengthened by 1.0% against a basket of 26 currencies. 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.